United States District Court, C.D. Illinois, Springfield Division
FINDINGS OF FACT AND CONCLUSIONS OF LAW
SCHANZLE-HASKINS, U.S. MAGISTRATE JUDGE.
matter came before the Court on February 19, 2019, for a
bifurcated bench trial. The Plaintiff Illinois Mine
Subsidence Fund (Fund) appeared by its attorneys Todd Schenk
and Aon Hussain. The President and CEO of the Fund Heidi
Weber also appeared at the trial. The Defendant Union Pacific
Railroad Company (Union Pacific) appeared by its attorneys
Gary Elden and Riley Mendoza. The parties have consented to
proceed before this Court. Consent to the Exercise of
Jurisdiction by a United States Magistrate Judge and
Reference Order entered August 22, 2018 (d/e 31). For
the reasons set forth and detailed below the Court enters
judgment in favor of Defendant Union Pacific and against the
Plaintiff Fund. The following constitutes the Court's
findings of fact and conclusions of law.
light of the Court's entry of judgment in favor of Union
Pacific, the Court denies as moot Union Pacific's Motion
at the Close of Plaintiff's Case for Judgment on Partial
Findings (d/e 52), Motion at Trial to Strike Akers Opinion
Testimony (d/e 53), and Motion at Trial to Strike Hosfield
Opinion Testimony (d/e 54).
State of Illinois created the Fund to provide reinsurance for
insurers that provide mine subsidence insurance to property
owners in Illinois. See 215 ILCS 5/803.1. The
statute required insurers to secure subrogation rights from
insureds for mine subsidence claims and authorized the Fund
to assert such subrogation rights against parties responsible
for subsidence damage. 215 ILCS 5/815.1. In 2014, Harold and
Tressa Besserman of Macoupin County, Illinois, allegedly
suffered mine subsidence damage to their home, a
single-family residence. In 2015, Ronald and Cindy Bartolino,
also of Macoupin County, Illinois, allegedly suffered mine
subsidence damage to their home, a single-family residence.
The residences of the Bessermans and the Bartolinos are
hereinafter referred to as the Residences. The Bessermans and
the Bartolinos both purchased homeowners' insurance
policies from Country Mutual Insurance Company (Country
Mutual). Those policies included mine subsidence coverage.
The Bessermans and the Bartolinos filed claims with Country
Mutual (collectively the Subsidence Claims). Country Mutual
had purchased mine subsidence reinsurance from the Fund.
Country Mutual paid the Bessermans $163, 600.00 and paid the
Bartolinos $71, 400.00 on their claim. The Fund reimbursed
Country Mutual under the reinsurance policy a total of $235,
000.00 ($163, 600.00 $71, 400.00).Transcript of Trial
Proceedings Volume 1 (d/e 58) (T. 58), at 66-69
(Lovrak); Exhibit 199, Claims Files for
Bessermans and Bartolinos, at ¶ 0002009 (Country
Mutual Check to Bessermans), F0002016 (Fund approval of
reimbursement to Country Mutual for payment to Bessermans),
and F0002285 (Fund check to Country Mutual for reimbursement
of Bartolinos' claim).
Fund brings this action against Union Pacific as subrogee of
the Subsidence Claims to recover the $235, 000 in reinsurance
paid on the Subsidence Claims, plus interest and costs.
First Amended Complaint (d/e 21) (Complaint), ¶
59 and Prayer for Relief.
Pacific, however, did not own or operate any coal mines.
Superior Coal Company (Superior) owned and operated the mines
that the Fund alleges caused the subsidence damage to the
Residences and gave rise to the Subsidence Claims. Superior
operated four coal mines in Macoupin County from 1904 through
1953. Superior was dissolved in 1957 (Superior Dissolution).
Stipulation of Undisputed Facts (d/e 34) (Stipulation of
Facts), ¶¶ 8, 42. The Fund alleges that
Superior's parent corporation, the Chicago and North
Western Railway Company (CNW), was liable for all the acts of
1995, CNW merged into Union Pacific. Stipulation of
Facts, ¶ 45.Union Pacific agrees that, after the
merger, it is liable for all liabilities of CNW but denies
that CNW was liable for Subsidence Claims or any other claims
against Superior that were not known in 1957 when Superior
dissolved. See Defendant Union Pacific Railroad
Company's Answer and Affirmative Defenses to the
First Amended Complaint of the Illinois Mine Subsidence
Insurance Fund (d/e 22) ¶¶ 14, 65;
Stipulation of Facts, ¶ 45.
Fund and Union Pacific have previously litigated similar
subsidence claims. One such case involved a subsidence at a
public school building in the town of Gillespie located in
Macoupin County, Illinois. Gillespie Community Unit
School Dist. No. 7, Macoupin County v. Union Pacific R.
Co., 2015 IL App (4th) 140877, 43 N.E.3d 1155
( Ill. App. 4th Dist. 2015) (Gillespie).
The Fund was a party plaintiff in Gillespie.
Gillespie, 43 N.E.3d at 1161. The Fund claimed in
Gillespie that CNW was liable for damages resulting
from subsidence of Superior's mines because: (1) CNW
agreed to assume all of Superior's liabilities including
contingent liabilities for future subsidence claims as part
of the Superior Dissolution; (2) CNW was a direct participant
in Superior's business operations; or (3) CNW operated
CNW and Superior as a single entity so that the two
corporations were “alter egos” of each other and,
therefore, the Court should “pierce the corporate
veil” between Superior and its stockholder CNW, and
hold CNW liable for all of Superior's debts. The third
claim is referred to as the “alter ego” claim.
Gillespie, 43 N.E.3d at 1172, 1179, 1180.
Illinois Appellate Court in Gillespie found that CNW
only agreed to assume Superior's liabilities that were
known at the time of the Superior Dissolution in 1957, and
CNW did not agree to assume unknown, contingent liabilities
such as the Subsidence Claims. Gillespie, 43 N.E.3d
at 1176-79. The Illinois Appellate Court further found
that CNW was not liable under a theory of direct
participation. Gillespie, 43 N.E.3d at 1179-80.
Illinois Appellate Court in Gillespie remanded the
alter ego claim for further proceedings. Gillespie,
43 N.E.3d at 1162. The case was settled on remand. As a
result, the alter ego claim was not fully litigated. See
Opinion entered January 16, 2019 (d/e 44), at 5-7.
case, the Fund realleges the alter ego claim. The Fund also
alleges in the alternative that CNW assumed all of
Superior's liabilities because the Superior Dissolution
constituted a de facto merger of Superior into CNW.
Complaint, ¶¶ 60-78. The Fund did not
assert the de facto merger claim in the Gillespie
parties stipulated to a bench trial and to bifurcate the
issues of liability and damages for trial. Agreed
Stipulation Regarding Litigation (d/e 32). Pursuant to
this stipulation, the Court bifurcated the bench trial.
Minute Entry entered September 17, 2018. In this
phase of the trial, the Court tried whether CNW was liable
for claims against Superior that were not known at the time
of the Superior Dissolution, including the Subsidence Claims,
under either the Fund's alter ego claim or its
alternative de facto merger claim. All other issues were
reserved for subsequent proceedings.
Fund brought this case in 2017. The relevant events occurred
between 1902 and 1957. By 2017, the individuals with personal
knowledge of the relevant events were all deceased. Both
parties rely exclusively on historical documents and data
(Historical Record) and the opinions of experts who reviewed
the Historical Record. Neither party has challenged the
admissibility of the documents and data comprising the
Historical Record, but both have challenged the admissibility
of some or all of the testimony of the opposing party's
experts. The parties also agreed to use discovery produced in
other cases between the Fund and Union Pacific, including the
Formation of Superior
late 19th century and most of the 20th
century, CNW operated railroads in the United States. Prior
to 1945, most of CNW's locomotives burned coal. In 1902,
CNW acquired mineral rights or fee ownership to a total of
25, 000 acres in Macoupin County, Illinois (Coal Lands). Ex.
161, Superior Coal Company Dissolution Records
Compilation (Superior Dissolution Compilation),
at UP-ST176060. In 1903, CNW incorporated Superior as an
Illinois corporation. The Superior articles of incorporation
stated the purpose of Superior:
The object of the corporation shall be to mine and sell coal,
and for that purpose to acquire, own and lease such lands and
to acquire and hold such coal rights, and such other real and
personal estate as may be necessary.
Ex. 1, Superior Coal Company Minute Book Vol. 1 (Superior
Minute Book Vol. 1), at UP-ST175661.
initially contributed $1, 500, 000.00 to capitalize Superior.
In April 1904, CNW contributed an additional $500, 000.00 in
capital to bring Superior's total capitalization to $2,
000, 000.00. As part of the capital contributions, CNW
conveyed the Coal Lands to Superior. Superior issued 20, 000
shares of stock. All shares were voting. Stipulation of
Facts, ¶¶ 1-4; Ex. 1, Superior Minute Book
Vol.1, at UP-ST175676-78.
20, 000 shares, 19, 995 were owned by CNW in its own name.
Each of Superior's five Directors was named as the owner
of one of the five remaining shares (Directors' Shares).
Illinois corporation law at the time required directors to be
“bona fide shareholders.” See Gillespie,
2015 IL App (4th) 140877 ¶ 17; 43 N.E.3d at
1163. The bylaws of Superior tracked the Illinois law and
also required the Directors to be “bona fide
shareholders.” Ex. 1, Superior Minute Book Vol.
1, at UP-ST175666.
paid all of the capital contributions to Superior for all 20,
000 shares of stock. Stipulation of Facts ¶ 3.
The initial Directors did not pay anything to anyone to
purchase the Directors' Shares. The Superior Directors
always voted the Directors' Shares in accord with the
vote of the 19, 995 shares owned in the name of CNW. See
e.g., Ex. 1, Superior Minute Book Vol. 1, at
UP-ST175687. No. documentary evidence exists of any
dissenting vote of a Superior Director during Superior's
operations. Stipulation of Facts, ¶ 5.
reported to the Interstate Commerce Commission (ICC) that it
owned all of the stock in Superior. See e.g., Ex. 4,
Annual Report of CNW to the ICC for year ending June 30,
1915, at UP-ST004767; Ex. 5, Annual Report of CNW to
the ICC for year ending June 30, 1916, at UP-ST0006255;
Ex. 6, Annual Report of CNW to the ICC for year ending
December 31, 1916, at UP-ST006396. Superior represented
to the Illinois Department of Finance that CNW owned all of
its stock and that the “five director's qualifying
shares” were “held for the Railway
Company.” Ex. 89, In the Matter of the Sales Taxes
of Superior Coal Company (Illinois Department of Finance No.
156 August 6, 1935), Trial Exhibit 1, Summary of History of
the Superior Coal Company and its Relations with the Chicago
and North Western Railway Company (1935 History of Superior
Coal and CNW), at SDSJ 161. The stockholders'
consent to dissolve Superior dated September 30, 1956, also
recited that CNW owned all the stock, “[A]ll of the 20,
000 share of capital stock of the Superior Coal Corporation,
a corporation of the state of Illinois, are owned by Chicago
and North Western Railway Company, a Wisconsin corporation,
and all such shares are held in its name except for five
Directors' qualifying shares.” Ex. 136, Consent
to Dissolution dated September 30, 1956, at UP-ST094700;
Ex. 239, accord Resolution of CNW Board of Directors
dated September 30, 1956, at UP-ST197567.
evidence demonstrates that from the inception of Superior,
CNW and the Superior Directors intended that the Directors
would hold the Directors' Shares for the benefit of CNW.
CNW contributed all the capital for the stock; the Directors
paid nothing. The Directors of Superior were also always
officers or employees of CNW. Ex. 89, 1935 History of
Superior Coal and CNW, at SDSJ 162; Plaintiff's
Post-Trial Brief (d/e 63), Exhibit A, Summary of
Officers and Directors of Superior and CNW from 1936-55.
When a Superior Director resigned, the successor Director
became the owner of the share of stock previously owned by
the resigning director. The resigning Director did not
receive any compensation for his ownership of one of the
Directors' Shares, and the new Director did not pay
anything for the stock. See T. 58, at 238-40
(Hosfield). The Directors further did not receive any
dividends from Superior. Stipulation of Facts,
¶ 6. When Superior was dissolved, the remaining assets
were distributed to CNW only, no assets were distributed to
the Directors. Stipulation of Facts, ¶ 40. The
Directors always voted the five shares of stock with the 19,
995 shares that CNW owned in its own name. CNW consistently
represented to the public and government agencies it owned
all the stock of Superior. The Court finds that from the
inception of Superior and throughout Superior's existence
and its dissolution, CNW and the Directors understood that
CNW would make the entire capital investment in Superior for
all of the Superior stock and receive all the benefits of
ownership from the stock, and the directors would hold the
Directors' Shares for the benefit of CNW.
Superior's General Operations and Relationship with
incorporated, Superior commenced mining operations. During
the first 10 years of operation, Superior opened Mines 1, 2,
and 3 on the Coal Lands. In 1917, Superior opened Mine No. 4
on the Coal Lands. Ex. 101, Report of Nye F. Morehouse,
CNW Vice President and General Counsel dated March 12, 1953
(Morehouse 1953 Report), at UP-ST192639.
mined coal to supply CNW. Throughout its existence, Superior
sold at least 95 percent of its coal production to CNW.
Transcript of Trial Proceedings Volume 3 (d/e 60) (T.
60), at 666 (Schwartz); Ex. 193, Deposition of Seth
Schwartz dated February 16, 2017, at 17. Superior did
not incur costs associated with marketing coal; it did not
need to because it existed to serve its one customer, CNW.
See Ex. 103, Supplemental Report of Nye F.
Morehouse dated March 26, 1953 (Morehouse 1953 Supplemental
Report), at UP-ST175410.
its approximately 54-year existence, Superior sold five
percent of its total production to third parties. From 1905
to 1914, Superior sold 5 to 20% of sales to third parties.
Beginning in 1947, Superior sold small particles of coal
called screenings to third parties. CNW could not use
screenings in locomotive engines. Beyond the sale of
screenings, Superior sold small amounts of coal to employees
for personal use. Transcript of Trial Proceedings Volume
2 (d/e 59) (T. 59), at 383-94 (Akers); T.60, at 650-51,
703-05 (Schwartz); Ex. 74, Superior Annual Report for
Year Ending December 31, 1947, at UP-ST003958;
Ex. 264, Expert Report of Seth Schwartz dated August 3,
2018 (Schwartz Expert Report), at CM/ECF page number 42
of 48; Ex. 75, Superior Annual Report for Year Ending
December 31, 1948, at UP-ST003974; Ex. 76, Superior
Annual Report for Year Ending December 31, 1949, at
offices were located within CNW's offices in Chicago,
Illinois. Superior's President reported to CNW's
President. CNW's legal and accounting departments
performed Superior's legal and accounting functions. Ex.
91, Collective Exhibit of Materials Filed Before the
Illinois Supreme Court in Superior Coal Company v. Department
of Finance, Ill. Sup. Ct. April 1941 Term No. 26166 (Supreme
Court Filings), at GSD16-000140 - GSD16-000141; T. 58,
at 179-81 (Hosfield); T. 60, at 569 (Hilton). Superior's
corporate records, tax records, and land records were kept by
CNW's secretary, land commissioner, and accountant.
CNW's Insurance Department, Mechanical Department, as
well as CNW's engineers and chemists, provided services
to Superior. CNW's coal inspector and water supply
supervisor held the same positions for Superior. T. 58, at
178-79 (Hosfield); Ex. 91, Supreme Court Filings, at
GSD16-000139-140. Superior did not pay for the office space
or these services. See T. 59, at 536-38 (Hilton).
accounting books and records, however, were kept separate
from the records of CNW. See T. 59, at 522-23
(Hilton). Superior also maintained all necessary formalities
of a separate corporation. Superior held regular meetings of
its board of directors and shareholders, kept separate
corporate records and separate bylaws. Ex. 89, 1935
History of Superior Coal and CNW, at SDSJ 165 - SDSJ
167; T. 59, at 489-90, 502-05, 514, 517-18, 523-25 (Hilton).
Superior and CNW issued separate annual reports. See
T. 59, at 525-26 (Hilton). Superior and CNW had separate
workforces and negotiated separate collective bargaining
agreements with separate unions. T. 59, at 450 (Akers); T.
59, at 519-21 (Hilton). Superior paid its own bills out of
its own accounts. T. 59, at 505 (Hilton). Superior kept
records of its transactions with CNW on accounts payables and
accounts receivables ledgers. See Ex. 251,
Superior Accounts Receivable Ledger for 1935; T. 59,
at 507-08 (Hilton).
Superior executed agreements for coal sales for most years
from 1919 to 1930. Thereafter, CNW and Superior entered into
multi-year agreements for the sale of coal. The agreements,
however, did not set prices or quantities of coal to be sold.
See Ex. 264, Schwartz Expert Report, at 43
of 48; Ex. 232, Ledger of Superior Contracts; T. 60
at 636-39, 674-75 (Schwartz). In practice, CNW coal orders
went through Superior President Fred Pfahler. Pfahler also
worked for CNW as its Coal Traffic Manager. The general
manager of CNW would notify Pfahler weekly of the quantities
of coal needed and the locations for delivery. Pfahler
prepared monthly “tonnage statements” in which he
would estimate the price of the coal delivered for the month
equal to the cash needed to meet ongoing expenses, or the
cost of operating. Ex. 91, Supreme Court Filings, at
GSD16-000134 - GSD16-000135. See Ex. 93,
Superior Coal I, Record on Appeal to the Illinois Supreme
Court (Superior Coal I Record on Appeal), at GSD6000078
- GSD600079, GSD6000083, GSD6000105 - GSD6000108, GSD000115
(Testimony of Fred Pfahler before Department of Finance
Hearing Examiner), and GSD6000240 (Letter from CNW General
Purchasing Agent to Pfahler dated June 7, 1937 ordering coal
for June 17, 1937); Ex. 109, CNW Finance
Committee Minutes dated May 14, 1954, at
secured coal from Superior for less than it would have paid
to third-party suppliers. Superior generally sold coal to CNW
at cost or slightly above cost. CNW also reduced its shipping
costs by extending its rail lines to Superior's mines and
thereby avoiding third-party shipping costs. Ex. 89, 1935
History of Superior Coal and CNW, at SDSJ 164, SDSJ 170.
Ex. 103, Morehouse 1953 Supplemental Report, at
UP-ST175410, UP-ST175411; Ex. 87, Memorandum of Agreement
between CNW and Superior dated December 27, 1934 (1934
Agreement), at UP-ST003297 - UP-ST003300; Ex. 91,
Supreme Court Filings, at GSD16-000134 -
GSD16-000135; T. 59, at 426-27 (Akers); T. 60, at 646-47,
700-01 (Schwartz). CNW estimated that it paid $.73 per ton
below the commercial price of coal during the eight months
ending August 31, 1936. Ex. 103, Morehouse 1953
Supplemental Report, at US-ST175410; see Ex. 83,
Agreement between Superior and CNW dated July 22, 1932
(1932 Agreement), at UP-ST024731 (Superior sold CNW coal
“at a price lower than the railway company can purchase
the same grade of coal elsewhere.”). But see,
T. 59, at 404-14 (Akers) (Superior charged more than cost
from 1919 to 1925 to fund capital investments); Ex. 83,
1932 Agreement and Ex. 87, 1934 Agreement,
(Per these agreements, discussed in detail below, Superior
charged $.20 per ton over cost from July 1932 to December
1934); T. 60, at 642 (Schwartz) (Superior charged more than
cost of production from 1942 through 1953).
showed a net profit over its 50 plus years of existence.
CNW's expert Seth Schwartz opined that over the course of
its existence, Superior had total revenues of $221, 757,
257.00 and net income of $16, 212, 556.00, for a profit
margin of 7.3%. Ex. 197, Expert Report of Seth Schwartz
dated August 3, 2018, Appendix B, Supplemental
Disclosure Statement of Set Schwartz Exhibit E Superior Coal
Company Financial Results. CNW's other expert Thomas
Hilton opined that from 1926 to 1954, Superior had gross
income of $147, 742, 602.96, and operating income from 1926
to 1954 to be $15, 370, 022.13, or 10.4% of total revenues.
Hilton deducted tax accruals and other losses and special
expenses from operating income to calculate net income.
Hilton opined that Superior had net income from 1926 to 1954
of $6, 825, 345.00, for a profit margin of approximately
4.6%. Ex. 266, Supplemental Expert Report of Thomas E.
Hilton, dated September 10, 2018, at 4-27 - 4-29; see T.
60, at 597-98. After review of the calculations, the Court
finds Hilton's calculations of net income are more
accurate. Schwartz' calculations appear comparable to
Hilton's calculation of operating income, not net income.
Fund argues that Superior always sold coal at cost to CNW,
and so, did not earn a profit from those sales. The evidence
does not support such a finding. The Court agrees that some
of Superior's profits may have come from sales to third
parties. Also, some of the profit reflected money CNW
funneled through Superior to pay CNW's creditors. Some of
the profit reflected inaccuracies in estimates of costs of
production during the ordering and billing process between
Pfahler and the CNW General Manager. See T. 58, at
100, 136 (Hosfield). Even so, the 4.6% profit margin cannot be
explained away completely by these factors. The evidence
shows that Superior made a net profit from the sale of coal
to CNW over the entirety of its existence.
1911 to 1952, Superior declared $14, 725, 000.00 in
dividends, all of which were payable to CNW. The parties have
stipulated that these dividends were paid out of profits.
Stipulation of Facts ¶ 13. Superior declared
dividends 23 times during this period. Six times the
dividends were $1, 000, 000.00 or more. In light of
Hilton's calculations of Superior's net income, the
$14, 725, 000 in dividends exceeded Superior's net income
of $6, 825, 445.50. At least some of these additional
dividends were “paid” by accounting adjustments
on each company's balance sheets. As discussed in detail
below, Superior's largest dividend of $2, 150, 000.00 to
CNW in 1930 consisted of adjustments to the two
companies' balance sheets rather than payments to CNW.
Ex. 103, Morehouse 1953 Supplemental Report, at
until 1953, when Superior began closing its operations,
Superior remained solvent regardless of price charged or
dividends distributed to CNW. Hilton opined that from 1926 to
1953 Superior consistently generated enough income to fund
its operations. Ex. 266, Supplemental Expert Report of
Thomas E. Hilton, dated September 10, 2018, at 4-5
¶ 9(a); T. 59, at 496-97, 499 (Hilton). Hosfield and
Akers agreed with this opinion. T 59, at 339 (Hosfield); T.
59, at 448, 476 (Akers). Akers further agreed that Superior
did not lack sufficient capital to perform its functions and
meet its debts. T. 59, at 448 (Akers); see also T.
59, at 496-97 (Hilton) (Superior was adequately capitalized
and made capital improvements “on a regular and
continuous basis.”). The Court finds these opinions to
be credible. The Fund cites no evidence that Superior was
ever unable to pay its bills. Even after Superior started
closing operations in 1953, Superior still paid all known
creditors or provided reserves to pay them.
Fund argues that Superior could only pay its bills because
CNW provided enough money on an ongoing basis to pay
Superior's bills. See Ex. 91, Supreme Court
Filings, at GSD16-000134 - GSD16-000135; T. 59, at 478
(Akers). That observation does not show that Superior was
insolvent. Rather, that observation shows that CNW ensured
that Superior had the assets and income necessary to pay its
debts The Court finds that Superior was solvent and able to
pay its bills as they became due at least until it started
the process of closing down its operations in 1953. The Court
further finds that after Superior began closing operations,
Superior still paid its known creditors or provided reserves
to pay its known creditors.
Financial Transactions Between Superior and CNW
Superior, however, CNW had serious financial problems during
the Great Depression in the 1930s. CNW ultimately filed
bankruptcy in 1935. In the 1920s and early 1930s, Superior
and CNW engaged in several financial transactions to improve
CNW's financial condition. In 1925, Superior purchased
700 preferred shares and 1, 600 common shares of another CNW
controlled company, the Chicago, St. Paul, Minneapolis, and
Omaha Railway Company. Superior then deposited the stock with
the Central Union Trust Company of New York (Central Union
Trust) pursuant to an agreement between CNW and Central Union
Trust. Ex. 1, Superior Minute Book Vol. 1, at
UP-ST175802 - UP-ST175803. No. evidence indicates that
Superior received a direct benefit from this transaction.
1930, Superior declared a $2, 150, 000.00 dividend which
increased CNW's net worth by approximately $1, 800,
000.00 and decreased Superior's net worth by the same
amount. At the beginning of 1930, CNW owed Superior $1, 064,
421.62 for unpaid coal sales, plus additional debts of $550,
000.00, for a total debt of $1, 614, 421.62. Ex. 57,
Superior Annual Report for Year Ending December 31, 1930
(Superior 1930 Annual Report), at UP-ST004075. In 1930,
Superior declared the $2, 150, 000.00 dividend payable to CNW
as its stockholder. Ex. 103, Morehouse 1953 Supplemental
Report, at UP-ST175415. The $2, 150, 000.00 dividend
exceeded the combination of Superior's net income in 1929
and 1930 and its cash assets at the beginning and at the end
of 1930. Ex. 57, Superior 1930 Annual Report, at
paid the $2, 150, 000.00 dividend to CNW by off-setting
CNW's outstanding $1.6 million debt and by borrowing
approximately $550, 000.00 from CNW. At least $1, 000, 000.00
of these dividends were credited to an intercompany account
of CNW. Ex. 191, Deposition of Thomas Hilton (Hilton
Deposition), at 22-24; T 60, at 586-87 (Hilton). An
intercompany account is used to track transactions between
companies under common control. T. 60, at 590 (Hilton). At
the end of 1930, CNW owed Superior $371, 034.55 in unpaid
coal sales, but Superior owed CNW $553, 303.17 largely from
the loan used to fund the dividend transaction, resulting in
Superior owing a net debt of $182, 268.62 to CNW. Ex. 57,
Superior 1930 Annual Report, at UP-ST00474. As a
result of these transactions, CNW's net worth increased
by approximately $1, 800, 000.00 because it no longer owed
Superior $1.6 million and Superior now owed it approximately
$180, 000.00. Conversely, Superior's net worth decreased
by approximately $1, 800, 000.00 because CNW no longer owed
it $1.6 million and it now owed CNW approximately $180,
000.00. See T. 59, at 417-20 (Akers); T. 60, at
1932, CNW had a net operating deficit of $11, 216, 820.37.
Ex. 23, CNW Annual Report for year ending December 31,
1932 (1932 CNW Annual Report), at UP-ST078565.
CNW began borrowing large amounts of funds from the federal
government's Great Depression Era Reconstruction Finance
Corporation (RFC Loan). The RFC Loan required CNW to make
quarterly payments of $100, 000.00, totaling $400, 000.00 per
year. On July 22, 1932, CNW contracted with Superior (1932
Agreement) to make the quarterly payments on the RFC Loan.
Under the 1932 Agreement, CNW agreed to purchase at least 2,
000, 000 tons of coal annually at a price of 20 cents ($.20)
per ton over cost of production. The price resulted $400,
000.00 in annual income to Superior over the cost of
production. Superior agreed to issue dividends of $400,
000.00 annually ($100, 000.00 each quarter). CNW assigned its
rights to the dividends to the Reconstruction Finance
Corporation to satisfy the quarterly payments due on the RFC
Loan. Ex. 83, 1932 Agreement, at UP-ST024731,
UP-ST024733; See Ex. 87, 1934 Agreement, at
UP-ST003297 - UP-ST003298.
April 11, 1932, Superior deposited $50, 000.00 with CNW
“to be held and used for and on account of the Superior
Coal Company.” Ex. 1, Superior Minute Book, Vol.
1, at 175880. On December 28, 1932, $19, 500.00 remained
from the $50, 000.00 that Superior deposited with CNW in
April of that year. Neither party presented evidence of how
the $30, 500.00, from the initial $50, 000.00 deposit, was
spent. Superior used the remaining $19, 500.00 to purchase
debentures issued by CNW in 1933 (1933 Debentures),
effectively loaning the money to CNW. The Superior Board of
Directors authorized CNW's treasurer to purchase the 1933
Debentures. Ex. 1, Superior Minute Book Vol. 1, at
1933, CNW's financial problems continued, and Superior
continued to assist CNW. In 1933, CNW had a net operating
deficit of $7, 875, 418.69. 1932 CNW Annual Report,
at UP-ST078629. CNW had approximately $6.3 million in 1933
Debentures that came due on May 1, 1933, and approximately
$7.7 million mortgage bonds issued in the name of a CNW
subsidiary, the Fremont, Elkhorn, and Missouri Valley
Railroad Company (Fremont Bonds), that came due on October 1,
1933. CNW could not pay the principal balance at maturity or
refinance either the 1933 Debentures or the Fremont Bonds.
CNW offered the bond and debenture holders 50% of redemption
value in cash and 50% in CNW general mortgage bonds. CNW
borrowed the money from the Reconstruction Finance
Corporation to fund the 50% cash payout. By the end of 1933,
the principal balance of the RFC Loan increased to $15, 441,
200.00. Ex. 24, CNW Annual Report for the Year Ending
December 31, 1933, at UP-ST078630 - UP-ST078631.
owned $37, 000.00 of the 1933 Debentures. Superior's
Board of Directors voted to accept the refinancing of 50% in
cash and 50% in CNW mortgage bonds. The records from
Superior's Board of Directors state that CNW agreed to
pay a 10% cash advance upon surrender of the debentures.
Superior directed the treasurer of CNW to retain the 10% cash
advance and to buy more 1933 Debentures with the funds. Ex.1,
Superior Minute Book Vol. 1, at UP-ST175891 -
UP-ST17589. Buying more of the 1933 Debentures further
reduced CNW's debt owed to third parties not owned by
addition, in June 1933 Superior purchased $350, 000.00 in
Fremont Bonds and accepted the CNW refinancing proposal.
Superior again authorized the CNW treasurer to keep the 10%
advance cash payment to buy more Fremont Bonds. In September
1933, Superior purchased additional Fremont Bonds. Superior
again directed CNW's treasurer to retain the 10% cash
advance from the Fremont Bond refinance to buy more Fremont
Bonds. Id. at UP-ST175897 - UP-ST 175899,
UP-ST175902 - UP-ST175907. Again, Superior thereby reduced
CNW's debt to parties not owned by CNW.
1934, CNW had net operating deficit of $8, 276, 193.80. Ex.
25, CNW Annual Report for the year ending December 31,
1935 (1935 CNW Annual Report), at UP-ST078692. On or
about May 1, 1934, CNW borrowed up to $250, 000.00 on a
short-term loan from Chase National Bank and National City
Bank, both of New York City (Bank Loan). The two banks
demanded mortgage bonds issued by CNW with a $500, 000.00 par
value as collateral for the $250, 000.00 loan. Superior owned
$500, 000 par value CNW general mortgage bonds. Superior
pledged its bonds as collateral for the Bank Loan to CNW. By
August 1935, CNW had repaid the Bank Loan and the two banks
had returned the bonds to Superior. See Ex. 89,
1935 History of Superior Coal and CNW, at SDSJ 168 -
SDSJ 169; Ex. 1, Superior Minute Book Vol 1., at
UP-ST175914 - PU-ST175915.
in 1934, CNW refinanced approximately $4.5 million in bonds
that matured January 1, 1935 (1934 Bonds). CNW again offered
50% in cash (again borrowed from the Reconstruction Finance
Corporation), and 50% in long-term mortgage bonds. Ex. 25,
1935 CNW Annual Report, UP-ST078694. Superior again
owned some of the 1934 Bonds. On October 31, 1934, Superior
accepted the refinancing terms and authorized the cash from
the refinancing to be used to purchase additional 1934 Bonds,
again reducing CNW's debt to parties not owned by CNW.
Ex. 1, Superior Minute Book, Vol.1, at UP-ST175923 -
December 1934, the Reconstruction Finance Corporation agreed
to waive CNW's obligation to make five quarterly payments
on the RFC Loan due December 31, 1934 through December 31,
1935. Superior agreed to stop charging CNW $.20 per ton over
the cost of production for coal and CNW agreed to relieve
Superior of the obligation to declare the $400, 000.00 annual
dividend. Superior further agreed to sell coal to CNW at cost
from October 1, 1934 to December 31, 1935. Ex. 87,
1934 Agreement, at UP-ST003300;
see Ex. 89, History of Superior Coal and
CNW, at SDSJ 169 - SDSJ 170.
27, 1935, CNW officially decided to default on bonds totaling
$29, 464, 891.50 in principal and interest set to mature on
December 31, 1935. The next day, June 28, 1935, CNW filed
bankruptcy. A court-appointed trustee took over CNW's
property and operations. CNW had a net operating deficit in
1935 of $11, 070, 348.25. Ex. 26, CNW Annual Report for
the year ending December 31, 1935 (1935 CNW Annual
Report), at UP-ST078755, UP-ST078756. CNW remained in
bankruptcy until 1944.
The Sales Tax Dispute
1935, Superior had a dispute with the Illinois Department of
Finance over whether Superior owed Retailers' Occupation
Tax (Sales Tax) on coal sales to CNW. The Department of
Finance sought Sales Taxes on coal sales from July 1933 to
May 1935. Stipulation of Facts ¶ 16. Superior
took the position that its coal sales to CNW were not subject
to Sales Taxes because Superior was a department of CNW and
not really a separate corporation, “At all times since
its organization, the Superior Coal Company has been under
the complete domination and control of the Railway Company as
a mere branch or department of the Railway Company's
business.” Ex. 89, History of Superior Coal and
CNW, at SDSJ 164. According to Superior's court
filings during the Sales Tax dispute, the “sales”
of coal were really intradepartmental transfers within CNW,
not sales subject to Sales Tax. Ex. 91, Supreme Court
Filings, at GSD16-000133 - GSD16-000135. Superior
further asserted in court filings that:
The Coal Company is without funds except as supplied by the
Railway Company for coal; the ”price” of coal is
fixed by the unilateral determination of the Railway Company
management; nominal Coal Company officers are subordinate to
the railroad executive officers; and under the routine
observed the so-called “sales” are handled as
interdepartmental transactions except for the employment of
certain of the formal indicia of sales.
Ex. 91, Supreme Court Filings, at GSD16-000133.
Superior also memorialized the description of Superior as a
department of CNW in the 1934 Agreement:
WHEREAS, for many years said Coal Company has, although
constituting a separate corporation, been managed and
operated, and its properties managed and operated, as a
branch or department of said Railway Company, and wholly in
in its interest; . . . .
Ex. 87, 1934 Agreement, at UP-ST003297.
Sales Tax dispute went through the administrative process and
judicial review until it reached the Illinois Supreme Court.
The Illinois Supreme Court issued its decision in 1941.
Superior Coal Co. v. Department of Finance, 377 Ill.
282, 36 N.E.2d 354 (Ill. 1941) (Superior Coal I).
The Supreme Court stated that a corporation cannot assert the
equitable alter ego doctrine to pierce its own the corporate
veil to avoid liability for taxes. The Supreme Court found
that, for tax purposes, Superior was a separate corporation
from CNW, and so, had to pay Sales Tax on coal sales to CNW.
Superior Coal I, 377 Ill. at 294-95, 36 N.E.2d at
Superior's Final Years
1, 1944, CNW emerged from bankruptcy. Ex. 35, CNW Annual
Report for the Year Ending December 31, 1944, at
UP-ST029150; see Ex. 103, Morehouse 1953
Supplemental Report, at UP-ST175415; T. 59, at 424
(Akers). On July 28, 1944, Superior agreed to exchange $637,
500.00 in CNW general mortgage bonds for “new
securities provided for in the Plan of Reorganization of
Chicago and North Western Railway Company.” Ex. 1,
Superior Minute Book Vol. 1, at UP-ST716024.
did not pay any dividends to CNW from 1935 to 1945 including
the time that CNW was in bankruptcy. In 1946 and 1949,
Superior paid dividends of $1, 500, 000.00 and $1, 150,
000.00, respectively. Ex. 103, Morehouse 1953
Supplemental Report, at UP-ST175415 - UP-ST175416.
late 1940s, CNW converted its railroad operations from
coal-fired locomotives to diesel-powered locomotives.
Beginning in 1947, CNW no longer needed coal to fuel its
locomotives. CNW's demand for coal from Superior dropped
from 463, 000 tons in 1947 to 86, 000 tons in 1953. Ex. 103,
Morehouse 1953 Supplemental Report, at UP-ST175411;
see Stipulated Facts, ¶ 10.
1947, Superior started selling coal commercially to third
parties. From 1947 to 1952, Superior sold fine pieces of coal
called screenings to third parties. During this period,
Superior had annual net revenues of $161, 000.00 from sales
of screenings. Ex. 101, Morehouse 1953 Report, at
7, 1951, Superior abandoned Mine No. 1 as no longer
economically viable. Superior commenced salvage operations to
dispose of equipment and supplies related to the operation of
Mine No. 1. Ex. 2, Superior Minute Book Vol. 2, at
UP-ST191889 - UP-ST191890.
March 12, 1953, Nye Morehouse, Vice President of Superior and
Vice-President and General Counsel of CNW, wrote the
Morehouse 1953 Report. Morehouse stated that Superior had 18,
881 acres of virgin coal reserves with a recoverable coal
estimate of 117, 076, 407 tons. Ex. 101, Morehouse 1953
Report, at UP-ST192639. According to Morehouse, Pfahler
estimated the going concerns value of 18, 881 acres of virgin
coal rights to be $50 an acre. Morehouse reported that the
estimated market value of Superior's 1, 100 acres of the
Coal Lands held in fee ownership not to be in excess of $1,
000, 000.00. Morehouse said that these estimates assumed a
buyer interested in purchasing Superior as a going concern.
Morehouse said that the liquidation or salvage value of the
Coal Lands would be far less. Ex. 101, Morehouse 1953
Report, at UP-ST192642. Morehouse estimated the value ...